Why Netflix Will Fall

A month ago, when Netflix (NFLX) was trading at $39.60 a share (now just over $39), I initiated a short position on Netflix. The total amount shorted was for a 1/2 position out of a full position, accounting for about 15% of my portfolio.

I am instituting a stop limit order to curtail losses if I am wrong, at about a 7-10% loss, or around $42.50 - $43.50 and I advise you do the same. If I am wrong and the stock pokes through its 50 day moving average on the upside (which will present resistance on the way up) then you need to take your losses and get out. If, however, the stock nudges through that level on weak volume on an up day in the market, you might want to look at keeping or adding to your short position, with an even tighter stop.

There may very well be a slight bounce in the stock, but what we don’t want to see is a huge move to the upside breaking through resistance on high volume, which would render our short term trade null, at least temporarily, regardless of the longer term thesis.

Why:

As I recently wrote, I think that the stock has gotten way ahead of itself, and has now shown extreme weakness, good fundamentals or no fundamentals. This is a relatively short term trade, 1-4 weeks or so in length, playing the weakness in the stock, rotation into other discretionary names as the economy recovers, and an overall correction in shares of the company from its recent highs, which doubled from its lows in short order.

As investors rotate out of these recession plays and look at more discretionary stocks where people are likely to migrate once the fear of losing a job and a down economy subside, stocks like Netflix that were strong on the way up, despite a down market, will be the first to fall.

I believe that has already begun.

Disclosure: At the time of the original article date, the author was short NFLX.

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